14 May 2007

Close Trade recommendation for SPY (S&P Dep Rec) Double Diagonal initiated on 30 Mar 07

Trade Summary

SPY at 150.86
3 days to May expiration, 31 days to Jun expiration.

Sell SPY Jun 147 Call
Sell SPY Jun 136 Put
Buy SPY May 145 Call
Buy SPY May 138 Put

For a net price of $0.50 Debit or less.
Profit or Loss: -$65 per trade.

Trade Analysis

We decided not to roll this DD into an ITM iron condor for Jun because the market could go up even higher and we might lose more than what we lose now if we close. Closing up this losing trade now and free up the margin for new trades sounds like a better idea than to hold on to a dying trade. When we initiated this trade, SPY was trading at 141.50. Today SPY is trading at 150.86. Double diagonals are normally very resilient to losses because the back month options always have more time premium than the front month options. However, the SPY has moved so far ITM with the call options that the time value of the Jun 147 Call is less than the intrinsic value of the front month option of the May 145 Call. The Puts are practically worthless. This is the first time we have a loser double diagonal before the roll!

We will trade likely for Jun until we can see the market stablizes.

Gary

**********Trade History**********

30 Mar 2007

SPY (S&P Dep Rec) Double Diagonal initiated on 30 Mar 07

Trade Summary

SPY at 141.50
49 days to May expiration, 77 days to Jun expiration.

Buy SPY Jun 147 Call
Buy SPY Jun 136 Put
Sell SPY May 145 Call
Sell SPY May 138 Put

For a net price of $0.15 Debit or less.
Total margin required: $215 per trade.

Trade Analysis

There is an old Chinese saying that all good things come in pairs. Well, looks like it is pretty true today. Both the DD that we are eyeing got filled. This is another one that we've been waiting. We'll prefer to be filled at the price of $0.10 instead of $0.15. But the current roll value makes it irresistible.

This DD is currently very neutral also, having a delta of -1.08. We are short May 138 put and May 145 call, which means that we have a profitable range of about $7 on the SPY. $7 SPY translates to about 70 points on the SPX. At the current level of 141.50, we have a head room of about 35 SPX points and a leg room of about 35 SPX points.

Again, it is not impossible that the SPY will breach 138 on the downside and 145 on the upside in 76 days. In this kind of market, nothing is impossible. However, we believe this DD is a low risk one when we take the potential reward into consideration. As you can see on the chart, the current 145/138 Apr/May roll is valued at $1.75! If we entered this DD a month ago, we could have a May condor for about $1.75! That means we are only risking $25 to make $175 per trade with SPY currently at 141.50. This is what high IV can do. But, sadly, we are late by a month. We can only hope that when the time comes for us to roll, we can get something close to that. Well, we'll see.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

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